CTS Corporation — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 28, 2014. CTS manufactures electronic components and sensors for automotive and other end markets; following its October 2013 sale of its Electronics Manufacturing Services (EMS) business, it reports one business segment. Prior-period operating comparisons below are on a continuing-operations basis unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $100.0 million | $103.6 million | $303.6 million | $307.1 million |
| Gross margin | 32.5% | 30.9% | 31.9% | 29.7% |
| Operating earnings | $11.2 million | $7.6 million | $32.0 million | $12.7 million |
| Net earnings (loss) | $8.1 million | $6.8 million | $19.6 million | $(0.9) million |
| Diluted earnings (loss) per share | $0.24 | $0.21 | $0.57 | $(0.03) |
- Q3 operating margin was 11.2% versus 7.3%; nine-month operating margin was 10.5% versus 4.1%.
- For the first nine months, operating cash flow was $15.3 million, down from $25.5 million. Capital expenditures were $9.0 million; cash from operations less capital expenditures was approximately $6.3 million.
- Cash and equivalents were $130.9 million at September 28, 2014, compared with $124.4 million at year-end 2013. Long-term debt was $80.3 million, up from $75.0 million. The $200 million revolving facility had $117.2 million available; CTS was in compliance with its covenants. Its weighted-average borrowing rate was 1.5%.
- Current assets were $244.5 million and current liabilities $84.3 million at quarter-end. CTS reported shareholders’ equity of $311.5 million.
- During the nine months, CTS paid $4.0 million in dividends and repurchased $5.1 million of stock. Dividends declared per share were $0.040 in Q3, compared with $0.035 a year earlier.
Material changes and management commentary
- Sales declined 3.6% in Q3 and 1.1% year to date. Q3 automotive sales were affected by a $3.9 million special order in the prior-year period; excluding that order, automotive sales increased 2.9% for Q3 and 4.6% year to date. Other sales weakened, particularly frequency, filter and HDD products, partly offset by higher piezo shipments.
- Gross margin improved on productivity, product mix and, year to date, restructuring savings and favorable foreign exchange. SG&A declined due to cost controls, restructuring, lower CEO-transition costs than in 2013 and pension income versus expense; investments in selling and marketing partially offset savings. R&D was 5.5% of sales year to date versus 5.8%, while Q3 R&D spending rose modestly as CTS pursued growth and product development.
- Nine-month continuing earnings improved from a loss to a profit, alongside lower restructuring charges and reduced SG&A. The prior-year nine-month tax expense included $10.8 million related to repatriating approximately $30 million from Singapore, contributing to the unusually high 118.6% effective tax rate in 2013; the 2014 nine-month rate was 36.1%.
- The EMS sale to Benchmark was completed October 2, 2013 for approximately $75 million. EMS contributed $55.9 million in Q3 2013 sales and $153.6 million for the first nine months of 2013, and its earnings are presented as discontinued operations. Thus, reported net sales comparisons exclude EMS, while 2013 net earnings include EMS discontinued-operation earnings.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management said operating cash flow and available credit should be sufficient for working capital, capital expenditures and debt service for at least the next 12 months; it may pursue additional financing for liquidity or acquisitions.
- Restructuring charges were $4.8 million for the first nine months of 2014. The April 2014 plan targets approximately 120 job eliminations and consolidation of Canadian operations, with completion expected in 2015; $3.0 million of its planned $5.7 million total charges had been incurred. The June 2013 plan targets approximately 350 positions and was expected to be completed in 2014; incurred charges were $16.1 million against planned costs of $18.6 million.
- CTS was co-defendant with Toyota in approximately 42 open U.S. and Canadian lawsuits related to vehicle acceleration allegations; it had been dismissed from 31 others. Toyota agreed to defend and indemnify CTS for certain third-party claims, but exceptions, government-related costs and possible insurance shortfalls remain relevant.
- Environmental remediation matters include several non-CTS sites. Management stated that provisions for probable costs were adequate based on information available. Other stated risks include customer concentration, market demand and pricing, foreign exchange, international operations, technology changes and restructuring execution.
- One customer represented 11.3% of Q3 sales and 10.6% of nine-month sales. CTS said there had been no material change in market risk since year-end 2013 and no significant change in risk factors.
Important facts for investors to verify
- Whether continuing-business sales trends, especially automotive growth excluding the prior-year special order and softness in other product lines, persist.
- Whether improved margins and earnings are sustainable after restructuring savings, pension effects, foreign exchange and other unusual or timing-related items.
- Cash conversion and working-capital trends: nine-month operating cash flow fell, including a significant outflow from accrued liabilities.
- Remaining restructuring costs, schedule and execution, including the Canadian consolidation and the 2013 footprint actions.
- Revolver availability, covenant headroom, debt changes and the effect of interest-rate swaps; also assess the concentration of earnings and cash held outside the U.S.
- Developments in Toyota-related litigation, indemnification coverage and environmental contingencies.